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4 April 2019updated 08 Sep 2021 4:06pm

No-deal Brexit would not be the end of the world – just very, very, very bad

Britain would survive no deal – but survival should not be the height of a country’s aspiration.

By Sam Lowe

Despite all of the evidence to the contrary, some have convinced themselves that exiting the EU without an agreement – “no deal” – is a good idea. It is not.

But can the worst consequences of no deal be managed, at least? This is a question that requires further examination.

No deal supporters point to unilateral measures being taken by the EU and UK to mitigate the fall-out, holding them up as evidence that those warning of disruption are engaged in Project Fear 2.0.

No-dealers argue that, in the event of no deal, the UK will simply wave through imports from the EU, and say that puts to bed claims of food and medicine shortages. Likewise, there will be no disruption in Northern Ireland because the UK won’t bother to check anything, and the EU will carry out checks away from the border anyway, meaning we never needed an Irish backstop in the first place. British banks will continue selling to EU customers because the EU doesn’t want to lose access to London capital markets. Or so the stories go.

There is a kernel of truth to each of these claims, but in reality the ability of the UK and EU to unilaterally mitigate no-deal disruption is limited. To put it another way: the EU’s single market and customs union operate the way they do for a reason and are not readily replicable.

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The UK has not in fact committed to wave through all imports entering British ports from the EU. Instead it has introduced a scheme, which importers have to sign up for, and which allows users to submit a simplified declaration upon import, and defer submitting the full customs declaration and paying the tariffs owed until a later date. This is of course helpful, but it only applies to those companies who have registered – many haven’t – and still introduces more friction and cost than exists now.

 With regard to Northern Ireland, while the UK says it will not check anything crossing the land-border in the first instance, it acknowledges that such an approach could only ever be temporary, in part due to the smuggling arbitrage opportunities such a policy would create for those willing to take it (see: organised crime). Ultimately, the government concedes, the only sustainable solution for keeping the border free from physical infrastructure involves a long-term agreement between the UK, Ireland and the rest of the EU. Even under no deal it looks like we’d end up with some form of the much-maligned, but actually fine, Irish backstop.

On financial services, it is true that the EU and individual member-state regulators have taken measures to ensure that banks established in the EU can still carry out some functions from UK offices, and make use of London-based clearing houses, for example. But the reprieve will only be temporary. EU regulators are keen to avoid the risk of financial instability in the event of no deal, but are ramping up pressure on banks to move more and more of their operations and staff, to the EU.

Bluntly, anyone expecting a mass overnight exodus of British financial services firms has not been paying attention. Instead, we will see an erosion of economic activity – and a shift in investment to the continent – in any Brexit outcome other than remaining in the single market. And no deal would speed up the process significantly.

Remainers expecting the world to end in the event of no deal are setting the bar for failure too high. The UK will survive – but survival should not be the height of a country’s aspiration. No deal would see significant short-term economic disruption, however the government tries to mitigate it, and if it becomes a fixed state of being we would expect a permanent hit to inward investment and economic activity. 

More than anything, no deal would signal a complete abdication of responsibility by the British political class. For if no deal is to be avoided, decisions can only be delayed for so long. To take it off the table entirely politicians will need to either vote for a deal, most likely one that looks remarkably similar to the one that the prime minister has already agreed with the EU; or they will need to revoke Article 50 and call the whole thing off, perhaps after a second referendum. Neither choice is easy; neither without political fall-out.

Sam Lowe is a senior research fellow at the Centre for European Reform. Follow him on twitter @SamuelMarcLowe.

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